The much-awaited annual Central Economic Work Conference (CEWC) concluded on Friday, outlining the Chinese government's main economic objectives and policy plans for 2023.
In the conference readout, the senior leadership put the “stabilization” of growth, the labor market and inflation as its top priorities, and urged government agencies to improve collaboration and increase macro policy support.
Support growth
The Conference acknowledged the elevated downward pressures on economic growth from shrinking demand, supply shocks, expectation weakness, and external uncertainty. Therefore, as highlighted in the latest Politburo meeting, the conference put “stabilization” of growth, the labor market and inflation as the top priorities.
The government called for “reasonable” economic growth of higher quality and a “holistic improvement” of the economy. Echoing this, the conference set a supportive macro policy tone, prioritized boosting consumption, reiterated continued property policy easing, and called for explicit support for companies other than state-owned enterprises (SOEs), foreign investors, and companies that run online platforms. We think the government may set an “around 5%” growth target for 2023 at the NPC meeting next March, leaving some flexibility given Covid uncertainties and global growth slowdown.
Reopening expected to continue
Following the acceleration of Covid easing in the past month, the Conference reiterated its stance to balance Covid controls with economic growth and further refining Covid policies, which in our view means a continued exit from the “zero-Covid” policy. In particular, the conference called for better policy implementation to facilitate China to “get through” the ongoing Covid outbreak and ensure “a smooth transition” and social stability.
The policy priority is also explicitly shifted to containing severe and fatal outcomes of Covid. We believe this shows the senior leadership’s clear intention and determination to exit from “zero Covid” and normalize the economy. We expect China to continue its significant Covid easing and reopening the economy despite a sharp surge in Covid cases and an initial shock to the economy, though some remaining restrictions may linger in winter months in some localities.
Boosting consumption
The conference stated explicitly that “reviving and expanding consumption” is a top priority in supporting economic growth. The government vowed to support household consumption in property upgrading, electric vehicle (EV) sales, and elderly care services. We think the government may extend some support measures for consumption in 2023, enhance support for employment, especially young age groups and college graduates, and boost household income growth. Consumer sentiment and confidence have been cautious in the early stage of reopening, weighing on consumption in the coming months. After the Covid wave likely peaks in the first quarter of 2023, we expect household consumption to rebound notably. However, it may not be as strong as it was in mid-2020 or as it has been in the U.S. or EU. Meanwhile, the conference also called for accelerating key project investment in the 14th Five-Year-Plan, enhancing the inter-regional connection of infrastructure, and increasing policy credit support for qualified key projects.
Messages to non-SOEs, foreign investors and platform enterprises
Consistent with the top policy priority of supporting growth, the conference reiterated the government’s long-term commitment to supporting non-SOE development, welcoming foreign investors and investment, and underpinning development of platform enterprises, which is consistent with the key message sent from the 20th Party Congress Report. For the latter, after the significant regulatory tightening in 2021 and a stable policy tone in 2022, the conference showed a supportive stance for online platform enterprises, with an explicit call for the rapid development of the digital economy, normalization of sector regulation, and supporting the role of platform enterprises in economic growth, job creation and global competition.
This should help dispel some market concerns that China’s government may no longer care as much about economic growth and the market economy.
Support for the property sector
Compared with the Politburo meeting that made no mention of the property sector, the conference kept the “no speculation” stance in the overall property policy setting, but with a clear easing bias.
The conference called for stabilizing the property market, ensuring home deliveries, fulfilling developers’ “reasonable demand for financing,” effectively mitigating risks related to top developers and improving the condition of their balance sheets. These policy tones are consistent with the significant property policy support in mid-November to increase financial and credit support for developers and stalled projects. Moreover, the conference clearly showed the government’s support for “fundamental and upgrading” housing demand, which will likely be a key policy focus in 2023.
There are also more property policies to boost home sales. Since the major property easing in early November, developers have successfully issued bonds onshore, announced equity placements, and/or been granted new credit lines by domestic banks.
Additional easing of property policies might occur, including the further lowering of mortgage rates, reduction of down-payment requirements, relaxation of home purchase restrictions in more higher-tier cities, and more credit support for stalled projects from policy banks and commercial banks. Overall, property sales will stabilize at low levels in the coming months and rebound sequentially from the second quarter onward with the help of China’s reopening, leading to a 3-8% decline for the full year 2023 and will be a much smaller drag on GDP growth.
Macro policies
The conference said the proactive fiscal policy needs to be forceful and effective, and called for keeping “necessary” strength of fiscal spending. Meanwhile, the government also emphasized the fiscal sustainability and containment of local debt risk. This means a continued proactive fiscal policy, but likely with a smaller additional fiscal stimulus than 2022.
For 2023, we expect a small increase in both the headline general budget deficit (to about 3% of GDP) and new special local government bond financing (to 3.7 trillion to 3.8 trillion RMB, versus 3.65 trillion in 2022). The fiscal multiplier is likely to be higher in 2023, thanks to the expected fiscal revenue rebound and the possibility of smaller tax and fee cuts.
Infrastructure investment will grow, likely at a robust pace of 5% to 6%, albeit slower than the over-12% figure for 2022. The augmented fiscal deficit may continue to expand in 2023, but with a much smaller increase of less than 0.5ppt of GDP than over 3.5ppt in 2022.
The conference kept the “prudent” monetary policy tone with more “accurate and effective” measures.
The government called for continued ample liquidity conditions, increasing credit support for the real economy, especially small and midsize enterprises (SMEs), innovation, and green development, and keeping total social financing and M2 growth “largely compatible” with nominal GDP growth.
Looking forward, we expect no policy rate cut but potentially a lowering of the loan prime rate by 5 to 10 basis points, thanks to additional required reserve ratio cut, more use of liquidity facilities such as on-lending, and further reduction of banks’ deposit rate. This could help support robust but slightly slower credit growth.
As such, we expect China’s debt-to-GDP ratio to rise modestly by 7-8 ppt in 2023 after an increase of 8-9 ppt in 2022. The expected spike of CPI inflation in the first half of 2023 (more than 3% year-on-year in the first half) amid a rapid reopening will be unlikely to trigger the Chinese central bank’s policy normalization in our view given the still fragile growth recovery and a likely only transitory Covid shock.
Innovation and self-reliance
Consistent with the 20th Party Congress Report, the conference highlighted the importance of security in China’s industrial policy, while innovation and tech policy should focus on self-reliance in key technologies and components with bottlenecks.
China is set to utilize national resources to achieve breakthroughs in key technology research, with the government’s better organization and principal role of corporations. The government called for accelerating building a new energy system while it mentioned very little about carbon neutrality and decarbonization. New energy, AI, biomanufacturing, the green economy, and quantum computing are important frontier areas to receive more policy support.
Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank.
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